Insight and analysis on the impact of the new leases standard
Consumer market and retail companies should not underestimate the potential impact of the new leases standard that applies from 1 January 2019.
The new leases standard will require lessees to bring most leases on-balance sheet from 2019. For consumer market and retail companies, measuring the lease liabilities will be a real challenge and a number of sector-specific arrangements will be affected, including for leases with:
The lease liability and right-of-use (ROU) asset will be misstated if the lease term is incorrect. Assessing the lease term is subjective because a lessee needs to determine whether it is reasonably certain that the lease term will be extended beyond a termination or renewal option. This could be particularly challenging if options to terminate or renew the lease extend beyond a lessee’s typical forecasting period.
If a lease liability includes lease payments that vary based on an index or rate – e.g. open market rent reviews or the consumer price index (CPI) – then it is remeasured periodically for changes in that index or rate.
Conversely, variable payments that depend on sales or usage – e.g. turnover rents – continue to be expensed as incurred.
IFRS 16 features a variety of different transition options and practical expedients. Many of them can be elected independently of each other and some can even be elected on a lease-by-lease basis.
This means that consumer market and retail companies could face many possible permutations, making transition particularly challenging. If you haven’t already, start this process now as the transition approach you choose will have a significant impact on the carrying amount of net assets, and on trends in profit or loss in the post-transition years.
Read Accounting for leases is changing: What’s the impact on consumer market and retail companies? (PDF 584 KB) for more information on how IFRS 16 will affect these companies, and how we can help.
Visit our IFRS – Leases topics page for KPMG’s most recent publications on leases.